Commercial Payers to Drive Future Payment for IVD Industry

A polarizing new law that establishes commercial payment benchmarking will alter the IVD reimbursement landscape. But who will it help and who will it hurt?

By Charles Mathews

Since the 1980s, Medicare has been in the driver’s seat in terms of payer pricing for clinical diagnostics. Medicare would set values for individual current procedural terminology (CPT) codes on the clinical laboratory fee schedule (CLFS), and commercial payers would simply look up those values and pay a little more or a little less.

But the traditional system is about to change in a significant way.

On April 1, the Protecting Access to Medicare Act of 2014 (PAMA) was signed into law. This new law revamps the way tests on the CLFS will be valued by Medicare by tying Medicare payment rates for lab tests to commercial payer rates starting in 2017. It is expected that this shift will result in discounts up to 75% by 2022 and $2.5 billion in savings— from reduced spending on tests—for the Medicare program.

How Did We Get Here?Starting in the late 2000s, large commercial reference labs, such as Quest and LabCorp, began agreeing to steep discounts on many high-volume tests in exchange for exclusive laboratory contracts with private payers such as United Healthcare. Eventually, word got out that Medicare was paying the highest amount per test.

Then, in June 2013, the Office of the Inspector General (OIG) released a report stating that Medicare could achieve substantial savings by bringing payment more in line with other payers. In response, the Centers for Medicare and Medicaid Services (CMS) last year proposed to revisit the value assigned to all codes on the CLFS over a period of five years.

There was a concern, though, that if CMS did this by itself, the cuts could be arbitrary and dramatic. In response, the laboratory industry lobby worked elements into PAMA to set up a commercial payer benchmarking system.

Impact of PAMA on Payment
While there is a possibility that some elements may be reexamined prior to implementation, it is worthwhile to review the legislation in its current state. First, we can expect that the discounts commercial payers have negotiated will now be carried over to the Medicare fee schedule, particularly for high-volume tests. These rates will be based on the weighted median of private payer payment rates as reported by laboratories. This means that if Quest and Labcorp—which perform the majority of tests in the United States—have agreed to 50% of the current Medicare payment, then their price becomes the new benchmark for anyone billing for that test.

This dramatic shift to commercial payment benchmarking is a polarizing subject. AdvaMed and the American Clinical Laboratory Association (ACLA), for example, have argued that this benchmarking system actually provides more certainty about the pricing process and is preferable to alternative approaches that could have resulted in an estimated $8 billion in cuts.

Other organizations, such as the National Independent Laboratory Association (NILA), in contrast, believe that PAMA could threaten both market competition for clinical laboratory services and access to testing. The regional and community reference labs represented by NILA do not have the same economies of scale as the large labs and are therefore at a serious disadvantage. Hospital labs that rely on outreach testing will also be paid at the new, lower rates.

New Coding Options Interestingly, beginning in January 2016, innovators will also be able to request that CMS give their tests unique identifiers via the Healthcare Common Procedure Coding System (HCPCS). This would allow them to describe new advanced diagnostic laboratory tests, such as multianalyte or single laboratory offering, and new laboratory tests that are cleared or approved by FDA while waiting to get a CPT code.

This change should help address one of the most significant challenges in launching novel tests, which is securing coding. However, using another coding system in addition to CPT may cause some confusion. It should also be noted that the purpose of these codes is to track appropriate payment; they do not guarantee coverage.

These codes will also have their payment rates reported publically. With this in mind, innovators should only request these codes if they have some assurance of coverage and favorable pricing.

ConclusionThe laboratory industry has been able to put into law a system in which Medicare payment rates for lab tests will be based on private payer volumes and payment rates. This may have been a better alternative to what CMS was threatening. But it could threaten competition in the long run by giving the large labs an advantage over local labs. However, it will be some time before the full impact of the changes will be realized.

PAMA also contains elements that impact advanced diagnostic tests, coding options, and the Mol Dx program, which may benefit labs offering unique proprietary tests. A central aim of PAMA is to modernize the reimbursement system, which, in turn, will hopefully promote innovation and create a more transparent pricing and reimbursement process. Such goals are only achievable, however, if the laboratory industry remains vigilant throughout the rule-making process to ensure that a fair and workable payment system is put in place.

Charles Mathews is vice president at the consulting firm Boston Healthcare Associates where he specializes in diagnostics, with a focus on molecular diagnostics, value-based pricing for laboratory tests, and global companion diagnostic launch strategies.